Our article, The Simplest, Safest Withdrawal Strategy, which appeared last week, contained a couple of errors.
We stated that we used an assumed return of 9.58% for equities in our 60/40 portfolio based on the “historical average used by Ibbotson & Associates in their simulations.” That assumption was taken from this study by Ibbotson, but that study does not say how Ibbotson arrived at this assumption, so it was incorrect for us to state that it was based on a historical average. Nonetheless, Ibbotson’s assumption of 9.58% is very close to the historical annual return on large-cap US equities of 9.86% from 1926 through 2010.
Our simulations of the 60/40 portfolio also contained a mathematical error, which caused us to slightly understate the success rates.
The above corrections were made to the original article on August 29. We also updated the article to show success rates for a more optimistic assumption for equity returns of 11.6%. Lastly, we noted that Ibbotson’s assumed standard deviation of 20.32% approximates the standard deviation of monthly returns for US large-cap equities from 1926-2010, which was 19.19%, but the standard deviation of annual returns for that period was 16.7%. We noted that using that lower standard deviation would improve success rates.
The following is in response to our article, The Simplest, Safest Withdrawal Strategy, which appeared last week:
I greatly appreciate your work in this piece. Using TIPS beats most other portfolio options for retirement income, but I don’t think it is the best one. You cite Zvi Bodie for the idea that “the primary goal in retirement is to ensure that one is not a financial burden to one’s children.” I agree. But then one needs to deal with longevity risk – a 30-year window is not enough to do that (especially since so many people fear running out of money so much – recent studies say they fear it even more than death). In my view, but for the wealthy, a solution offered as relatively “safe” (not to mention “simple”) requires the use of annuitization, perhaps in conjunction with a portfolio solution.
Robert P. Seawright
Chief Investment & Information Officer
Madison Avenue Securities, Inc
San Diego, CA
Another reader asked whether I-bonds (inflation-protected Treasury-issued savings bonds) could be used in this strategy. Those bonds have the advantage that they are not subject to real interest rate risk. However, two issues make them undesirable for a de-accumulation strategy. Purchases of I-bonds are limited to $5,000 per individual or $10,000 per couple per year. Also, there is a penalty for redeeming those bonds during the first five years of the holding period.
The following is in response to Kristen Luke’s article, What You Don't Know About Stock Photos Can Hurt You , which appeared last week:
As a photographer who makes a portion of her living from selling stock photographs (both royalty free and rights managed), I'm happy to see you advising people to make sure they properly license photos and follow the license they are granted. Misuse and outright theft of images is pretty rampant and it's obvious that some people don't even realize that they are stealing someone else's livelihood by doing it. The photo you download is the result of years of training, hard work, expensive equipment and talent. Fortunately, technology such as tineye helps both agencies and photographers find instances of theft and misuse. Photographers own the copyright to their images the moment they click the shutter, and if they have registered those images with the US Copyright Office (not necessary to own the copyright but better protection for the photographer), copyright violators may be liable for attorney's fees as well as damages – including punitive damages.
Thanks for spreading the word. You're helping your readers and us hardworking pros too.
Marianne A. Campolongo
Freelance writer, editor and photographer
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